In this paper, we examine the influence of contract costs on the pricing of bank loans. We find that the loan spread depends on a bank’s screening and monitoring incentives through transparency and communication, which varies across differentially regulated classes of banks. This leads to significant price disparities in the loan market. Better information about borrower’s type encourages tighter lending standards and competition in laxity can arise with multiple banks. Both better information ex ante and stronger legal protection ex post are shown to facilitate the entry of low-cost outside competitors into credit markets. When banks can strategically adjust the test characteristics by investing resources in the screening technology, we show that credit markets are not easily contestable.